In this article, we will look at option income strategies, how to decide between put and call options, and other considerations for investors to maximize their risk-adjusted returns. Option Income Strategies Most option income strategies are designed to take advantage of time decay — or the theta — by collecting premiums. For example, the most common income strategy is a covered call where an investor sells the rights to acquire shares they own in exchange for a premium.
Whether you are option income in acquiring an equity position, already own equities, or simply do not wish to own any equities, there are option strategies that are suitable to generate income. In this post, we will explore the top 3 income generating strategies and how to add yield to various portfolios. To learn more about option income strategies, please view our recent webinar. Time Decay Theta — Expiration Dates Before exploring income generating strategies, it is important to understand the concept of time-decay theta and how it affects options pricing and the income received.
The call option becomes less valuable over time as the likelihood of the stock price exceeding the strike price is diminished.
Eventually, the option expires and the premium becomes a profit.
Examples: Covered calls, iron condors, or butterfly spreads. Debit Spreads — These are less common strategies whereby a call or option income is bought while selling another call or put for a net debit. Examples: Diagonal or calendar spreads. Option income strategies enable investors to generate an income that may be less risky or more lucrative than simply buying dividend paying stocks.
The risk is that the underlying asset will move in a way that leads an option to be exercised, which could result option income income a loss on the trade or the unwanted sale or purchase of an asset. Investors should take the time to fully understand options strategies before implementing them in their own portfolios.
The Hidden Risk of Option Option income Trading Traders of iron condorscovered call writersand sellers of naked puts all have one goal in common: option income. Can you blame them? After all, even when traded conservatively, certain option trading strategies can still yield income returns significantly higher than those investments traditionally available to fixed income investors.
The combinations of these trades form the basis for all stock option strategies — even complex strategies involving multiple timeframes. There are many different factors involved in the decision between put and call options, but it primarily boils down to who receives the assets in the end.
If you have the funds to purchase the shares if assigned, this is called a covered or cash-secured put. Long-term investors might want to generate an income from their long stock positions or use them as an alternative to dividend-paying stocks. Investors may use covered calls as a way to sell a stock more profitably.
Risk-averse investors might be looking for simple strategies.
Maybe options are an entirely new concept to you. No matter who you are, you can benefit from the most successful income options trading strategies. Keep reading to learn more about selling options for income. Selling options for income is easier than you might think.
But, many advanced options strategies rely on multiple options or even combinations of call and put options, while taking a neutral outlook on option income market. For example, the iron condor is built by selling one out-of-the-money put option, buying another out-of-the-money put option at a lower strike price, selling one out-of-the-money call option, and buying another out-of-the-money call option at a higher strike price.
The maximum gain is the net credit option income received when entering the trade and is received when the price of the underlying asset stays between the strike prices of the short put and short call.
What are realistic returns for options income trading?
As you can imagine, these strategies can become very complex. Click Here The Bottom Line Stock options come in two different flavors that can be combined in countless option income. When deciding between put and call options, investors should consider the expected direction of price movement, their goals with the underlying asset, and their risk tolerance, among other things.
The intent of this article is to help expand your financial education. Please seek the guidance of an investment professional before using stock options.